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Sicily’s Fiscal Problems Threaten to Swamp Italy

PALERMO, Sicily — As Prime Minister Mario Montifights to protect Italy from the contagion driving up its borrowing costs to perilous levels, one region in particular has been in the spotlight: Sicily, which some fear has become “the Greece of Italy” and is at risk of defaulting on its high public debts.

Mr. Monti wrote to Sicily’s regional president last week warning that he had “serious concerns.” The day before, an official in the Sicily branch of Italy’s leading industrialists association called for the island to be put into receivership by the central government to clean up its finances.

When headlines about a potential Sicilian default ricocheted the globe, the government quickly played down concerns and said it would send 400 million euros, about $486 million, to ease Sicily’s liquidity crunch so it could continue to pay salaries and pensions. One government official said that Mr. Monti’s letter had been intended for a domestic audience and that Sicily’s problems could not spread to other Italian regions.

But with Europe’s debt crisis, local politics quickly become international problems. And the flare-up over Sicily highlights the challenges that Mr. Monti is facing in trying to use pressure from European leaders and international markets to push Italy’s politicians to cut costs. Those expenses have ballooned after decades of a patronage system in which the state has been the primary means of employment in Sicily.

It was also a stark reminder of Italy’s national fragility as Mr. Monti struggles to prevent the country from requiring a bailout that would come with the onerous terms that have plagued the Greek and Spanish economies. On Friday, the Milan stock market dropped nearly 5 percent, and the difference in interest rates on Italian and German bonds rose to its highest levels in months, a sign that investors think Italy is a risky bet.

In an interview on Friday, Raffaele Lombardo, Sicily’s regional president since 2008, greeted the criticism with indignation. “Sicily is in trouble, but Italy is in trouble,” he said, leafing through papers on his minimalist glass desk in the ornate 18th-century Palazzo d’Orleans here, once the seat of the French princes who ruled the island.

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A military medal ceremony last week at Palermo’s 18th-century Palazzo d’Orleans, where Sicily’s regional president, Raffaele Lombardo, has his offices.Credit
Gianni Cipriano for The New York Times

“Sicily is at risk of default because Italy is at risk of default,” Mr. Lombardo said, adding that Moody’s, the ratings agency, placed Sicily at the same level as the Veneto, a wealthy northern industrial region, when it downgraded 23 Italian “sub-sovereign” entities last week. “We cut expenses, but we don’t grow,” he said. “It’s a spiral that is going to bring us to the abyss.”

But many critics say Italy — and Sicily in particular — has been driven into dire financial straits not by austerity but by the rampant public spending of the past, the product of an entrenched jobs-for-votes system that helped keep Italian governments in power and Sicilians employed.

Today, Sicily’s regional government has 1,800 employees — more than the British Cabinet Office — and the island employs 26,000 auxiliary forest rangers; in the vast forestlands of British Columbia, there are fewer than 1,500.

Out of a population of five million people in Sicily, the state directly or indirectly employs more than 100,000 of them and pays pensions to many more. It changed its pension system eight years after the rest of Italy. (One retired politician recently won a case to keep an annual pension of 480,000 euros, about $584,000.)

“Of course that’s too many,” Mr. Lombardo said of the forest rangers. But he said it was difficult to cut back because state workers have job protection. “We have to wait for them to retire.”

That system has come at a cost. Last month, Italy’s audit court issued a scathing report saying that Sicily had 7 billion euros, about $8.5 billion, of liabilities at the end of 2011 and showed “signs of unstoppable decline.” Sicily’s unemployment rate is 19.5 percent, twice the national average, and 38.8 percent of young people do not have jobs.

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“Sicily is in trouble, but Italy is in trouble,” Sicily’s regional president, Raffaele Lombardo said.Credit
Gianni Cipriano for The New York Times

Mr. Lombardo said the region’s liabilities had dropped to 5.3 billion euros, about $6.4 billion, out of an annual budget of 27 billion euros, about $32.8 billion, which he said was not alarming. But he said Sicily had “liquidity problems,” which he attributed to a drop in tax revenues because of the economic crisis.

Sicily was a special case long before the crisis hit. One of a handful of autonomous regions in Italy, it maintains almost full control of the tax revenues it generates, ostensibly in order to fund its own health care and education systems. In exchange, the central government sends it money as a kind of credit against expenses it incurs for services provided by the central government in other regions.

Mr. Lombardo said that the 400 million euros the government pledged last week but has not yet sent to Sicily were part of a credit of 1 billion euros, or about $1.2 billion, that Sicily is owed. “It’s not a present, it’s a credit,” he said. “It was planned, but it was late because the state also has its problems.”

The region’s autonomy also means that the central government has limited power to intervene.

“The real problem is that there are very serious doubts about the money coming in,” said Emanuele Lauria, a journalist for the daily newspaper La Repubblica and a co-author of “The Ballast: Waste and Privileges in the Free State of Sicily.” “The expenses are real, but the tax revenue coming in is fictitious.”

“Sicily became a state within a state,” Mr. Lauria added. Sicilian politicians “used that autonomy not as an instrument of development but as a way to do what they wanted so the state can’t touch them.”

The focus on Sicily also comes at a delicate time in the larger Italian political drama. In his letter last week, Mr. Monti said he expected Mr. Lombardo to uphold his pledge to step down at the end of July ahead of early regional elections in October that had originally been scheduled for next spring. The two are expected to meet in Rome on Tuesday to discuss the Sicilian situation.

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Credit
The New York Times

Mr. Lombardo, who belongs to the Movement for Autonomy — which believes that Sicily should secede from the Italian state, as unlikely as that is to happen — said he would step down as agreed. (He is under investigation for Mafia ties. He denies the accusations and has not been formally charged. He was jailed on corruption charges in the early 1990s, though he was later acquitted.) Until elections, he will be succeeded by a member of Sicily’s governing committee who is considered to have better ties with the Italian Finance Ministry.

In the interview, Mr. Lombardo accused supporters of former Prime Minister Silvio Berlusconi of running a smear campaign against Sicily because they were not ready for early elections — neither, he noted, were the center-left Democratic Party or the main centrist Catholic party, the Union of Christian Democrats.

Political analysts said there was some truth to Mr. Lombardo’s accusations. Sicily has always been a bellwether of Italian political trends — it backed the governing Christian Democrats during the postwar era and after 1994 switched its support to Mr. Berlusconi. The fact that the main parties in Sicily are not ready for elections mirrors the larger political chaos in Italy.

With its prosperous north and underdeveloped south, Italy is a microcosm of the euro zone itself. Political forces in northern Italy are reluctant to keep financing the south, with its organized crime problems and stagnant development. But as the economic crisis grows, experts say that organized crime groups are gaining power, providing financing when banks are loath to do so.

Experts said that Italy was also at risk of losing hundreds of millions of euros in European Union structural funds because Sicily had not put them to proper use.

Asked how that could change, Mr. Lombardo offered no specifics, beyond saying that Sicily needed a “revolution.”

Many Sicilians, for their part, take a world-weary view of the political class.

“If I steal a little, I go to jail; if I steal a lot, I advance my career,” Gioacchino De Giorgi, 34, said as he worked in a tobacco shop in downtown Palermo.

He said he was worried about the future. “You’ve seen what happened to Greece, what happened to Spain,” he said. “It will happen here.”

Gaia Pianigiani contributed reporting from Rome.

A version of this article appears in print on July 23, 2012, on page A4 of the New York edition with the headline: As Its Debts Mount, Sicily Risks Becoming the ‘Greece of Italy’. Order Reprints|Today's Paper|Subscribe